August 22, 2018
Going Beyond the 10k Checklist (good order to follow. If not durable, we should drop it)
• Overview – Give an overview on the business – what is the business, what units make it up, what products do the business have, who are the customers, where do they operate geographically, recent events (spinoffs, the stocks down 50%, why are we looking at this?) who’s their biggest customer, who’s their biggest supplier, what are their biggest product categories (or units, where is rev coming from)
• Durability – is the product durable? Have the companies always existed? Have there been changes and challenges before? What’s it based on? Why is this going to continue in the future? Is this a fad?
• Moat (does the company have a moat, and what would it be, EX from HBB- Do they outsource it to China, can they outsource it to China? Can other people replicate this easily?) competitive advantage- Where does the moat come from? – high switching costs, patents, contracts, network effects, shelve space, brand, economies of scale – logistics – sales per customer, location location location, regulatory, high barriers to entry, technical skill – reputation, Apple can’t trust a company that’s a startup, intellectual property - owns something that’s intangible, databases, credit records, sports rights, knowledge that others don’t have
• Quality (basically talk about ROC, how do they get that return on capital? Break it down, where does it come from? Do they have a higher retention rate? Where is the quality weak? Geoff always asked for customer retention rate, can you always find someplace where there are reviews by customers? Can you get anything that’s ranked in the industry? Like customer service, awards, customer satisfaction surveys, Glassdoor for company culture, need to read between the lines on Glassdoor, look at short interest vs. float, and read short thesis, high price or low price, customer reviews, what do individuals think of the products, which brand would you trust the most? If it comes back a mix then it’s probably the cheapest, how much r&d are they spending as a % of sales and in general, where are they spending this r&d, read Phil Fishers 15-point checklist for quality and growth
• Capital Allocation – History of dividends, stock buybacks, stock issuance, CARG in # of shares outstanding, see how management is compensated in the proxy (options, restricted stock, bonus – what are the targets that make up the bonus? ROE, ROC, market cap, etc., how much does management own of the stock? And how significant is that in regard to their salary? What did they say they were going to do in the past? What do they do with FCF historically, can get from transcripts as well, people on the board that we recognize, how much FCF compared to marketcap, could they buy it back? Is there enough float and is the stock liquid enough, did the company ever pay special dividends? Does the company ever acquire things? $MNRO- is their business growth through acquisitions? What type of prices do they pay? Stock or cash
• Value – what’s the PE, EV/EBITDA and how does that compare to other companies? Which competitor is better? Why would a company be more expensive or cheaper? Use 5 peers? EX - Is GM cheaper than Ford and why would that make sense? Talk about what management is guiding. Relative value vs. past and competitors, was there ever an offer that was refused or that fell apart? What would an LBO look like? Do they do LBO’s on companies like this? What prices do acquisitions happen in the industry or did peers pay? If looking at Kroger what did AMZN pay for whole foods, etc.
• Growth – break down growth. Let’s say they can grow 5% a year, how much is SSS, how much is price increase, how many active users, how much time might they be spending on it, are the ad expenses going up or down, break it all down by geography, are they going to grow in Mexico a lot but not the US, etc.? can they gain market share each year? Compare it to something else that’s already big. Can a cheesecake be as popular as chilis? Probably not. Always think in terms of nominal GDP, population growth, and inflation, how much have real sales grown
• Misjudgment – what are other people seeing on the short part of it, what can’t we predict that’s important to what we’re doing, what may we get wrong that our argument rests on, check % short, short thesis, look at press reports to see what people are saying could go wrong, can look at if all the stocks in the industry are affected or just this one, basically trying to find an explanation for why it’s cheap, VIC, read comments to figure out what other people think
• Conclusion – take all the things we’ve done and put a mini-analysis together, the elevator pitch – why why why, whats going to drive the stock. talk in terms of 3 things: how safe is this, how high quality is this, how cheap is this – safe: DEBT/EBITDA, F Z Score, years of positive earnings, cash flow, is it positive? Is it always positive? FCF, Variation in margins. Google S&P, Fitch, Moodys to check bond ratings, check interest rate on debt. Quality: long-term CAGR of stock, is it high enough, is it a good industry – CAGR on other stocks, is it a cyclical, are these companies’ products, services, etc. as good as the competition? Is the culture as good as other places? Cheap: EV-EBITDA, EV-SALES, relative valuation (cheap compared to self, cheap compared to peers) Private owner value, absolute value (is this stock cheap for a normal stock at a normal time – average stock is 15-16x PE in normal times)
• Appraisal – come up with a method for appraising the stock
Being the journalist: go to the proxy statement and find out who owns stock in the company, google all of their names to learn about who they are and learn about them
Get satellite images of their HQ and properties – get a sense of why they would put the HQ where it’s at, google the town to learn about income and significant things in the town
Glassdoor – if found anything that’s weird, look into it
Look for news on the company, EX: http://www.hawaiinewsnow.com/story/38722953/community-stunned-by-trees-mowed-down-in-west-maui-but-state-defends-project, write it down, the project is starting)
Look at BBB
Look for information about the industry group – timber, core processors – learn what that is, find what the company is and industry terms and stuff. What’s the business model?
Read reviews on websites like Yelp, TripAdvisor, Etc.
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